World Bank's Proposed Vulnerability Fund: A Gimmick for the Poor

No group is more vulnerable to the international financial
crisis and recession than the poor in developing countries. The
World Bank has offered a gimmick to help them out. A proposed
"Vulnerability Fund" seeks to siphon off 0.7 percent of developed
countries' stimulus packages for World Bank and United Nations
assistance to poor countries.[1]

Those familiar with foreign aid debates will recognize the 0.7
percent figure as a spin-off of the traditional call for rich
countries to transfer 0.7 percent of their gross domestic product
to developing countries. That proposal, though a favorite of the
aid industry, has earned well-deserved criticism because of the
lack of any empirical evidence linking it to actual needs in
developing countries--or indeed any evidence that aid flows in
general contribute substantially to development. Unfortunately, the
0.7 percent figure is no more justified in relation to stimulus
payments than it is in the case of aid flows.

Little Need for More Aid

Developing countries have been prospering under the globalized
free-market capitalism that has dominated the world economy since
the fall of communism. Per capita incomes in poorer countries (with
average incomes less than $5,000) have been growing over the last
decade at an average annual rate of about 2.6 percent.[2]

Data collected from the United Nations' Human Poverty Index
shows that about 4.7 percent of the world's people have escaped
poverty over the last 10 years.[3] Countries that have committed
more fully to the capitalist system (as evidenced by significant
increases in economic freedom as measured in the Index of
Economic Freedom) have done even better, moving about 5.8
percent of their populations out of poverty.[4]

Such gains are not surprising given the substantial sums that
have been flowing to developing countries through the free market
system. According to the Bank for International Settlements,
emerging markets earned current account surpluses of about half a
trillion dollars in 2007.[5] An additional $600 billion in investment
flows that year helped swell developing world coffers. Some
estimates show even higher flows.[6]

Remittances to developing countries from family members working
in developed countries added another $300 billion or so to the
capital flowing to developing countries.[7] Official development
assistance kicked in another $100 billion. For those of you doing
the math, that's over $1 trillion flowing through private sector
channels versus about one-tenth of that amount through official
government channels.

The World Bank's "Solution"

The risk for all, in both developed and developing countries, is
that in a time of trouble we will focus too much on what
governments can do and not enough on what the private sector can
do.

For developing countries, faced with total external financing
needs of $1.4 trillion or more, the World Bank offers to "almost
triple lending" to $35 billion in FY 2009[8] and calls on wealthier
governments to donate 0.7 percent of their stimulus packages as aid
to poorer countries. Assuming that stimulus packages might amount
to $2-3 trillion through 2010, this would add $14-21 billion in
assets for developing countries. Such sums are trivial compared to
the needs.

Where then to turn? The answer is the same as it has been for
the last 10 years, and indeed the last 200 years: the private
sector. The World Bank acknowledges as much in its listing of
"urgent priorities," which start with restoring confidence and
aggregate demand. The key to this, as stated by the bank, is
"renewed growth in global trade."

It is in this context that support by the Obama Administration
and some in Congress for "Buy American" and other protectionist
measures are so woefully off the mark. The Buy American provisions
in the recent stimulus bill, while propping up a few
non-competitive U.S. industries, will carry substantial costs borne
by "the American public, who will fail to get the best value for
their hard-earned taxpayer dollars; the U.S. workers who lose their
jobs when the companies they work for go out of business as
countries retaliate in kind; and the economy as a whole, which will
become less productive."[9]

As bad as that is, the costs for the poor in developing
countries are far worse. For those living on the margins of
existence, bad policies adopted by their governments or ours can
mean the difference between life and death. Here the World Bank
gets it right: "One of the greatest threats to increased trade
flows is protectionism and beggar-thy-neighbor policies, which need
to be resolutely resisted."[10] Amen.

A Treatment Worse Than the Ailment

The proposal for a "Vulnerability Fund" with its
all-too-familiar 0.7 percent price tag is sure to resonate with aid
advocates and politicians looking to demonstrate their compassion
for the poor. It is also a way for the World Bank to call attention
to itself and try to demonstrate its relevance in this time of
crisis. It is popular among those who look first to governments for
answers to imagine that international intergovernmental agencies
like the World Bank or the United Nations can solve our urgent
problems. They are doomed to disappointment.

Beyond all questions of competence and efficiency, it's a
problem of scale. The world economy is immense and immensely
complex. International institutions like the World Bank and the
United Nations are small. As expensive and wasteful as they are,
they still bring minimal resources to the table. However smart
their staffs, the knowledge they possess is miniscule compared to
the knowledge distributed throughout our economies in the minds of
all the private citizens working to better themselves. The genius
of the free market is that, with only occasional lapses, it
organizes this knowledge efficiently without central direction or
planning. No government or collection of governments can match the
effectiveness or the cost.

The Most Vulnerable Most at Risk

What is needed by the world economy, and especially by its
poorest citizens, is a renewed commitment by the governments of the
G-20 (and the World Bank) to promoting and protecting free market
capitalism, that engine of growth with a proven track record of
promoting increased prosperity for all.

The U.S. and the rich countries of the West can perhaps afford a
flirtation with socialism, as the Obama Administration seems to be
proposing. It will hurt, but we will survive. But for the poor in
developing countries, a turn away from the free market will be
catastrophic. That is the message the World Bank needs to be
delivering to the G-20, and that is the message the G-20 needs to
deliver to the world.

Ambassador
Terry Miller is Director of the Center for International Trade
and Economics at The Heritage Foundation.

[1]World Bank, "Swimming Against the Tide: How
Developing Countries Are Coping with the Global Crisis," paper
prepared for the G-20 Finance Ministers and Central Bank Governors
Meeting, Horsham, United Kingdom, on March 13-14, 2009, p.
13-14.

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